August 04, 2016
Charles Lane gets the story on homeownership at least partly right in his Washington Post column today. It is not necessarily bad that fewer people are homeowners, if the drop is due to people with very little equity in serious danger of losing their home. It is also worth adding that in an economy where few people can count on stable employment, homeownership is not necessarily a plus, since it can make it more difficult for unemployed workers to move to areas with more jobs.
However Lane gets a few other things badly wrong. He gives readers the happy news on home equity:
“Contrary to entrenched conventional wisdom, however, the ongoing decline of the homeownership rate is actually good news.
“Here’s why: Thanks to recovering real estate values, today’s homeowners as a group have the same equity in their property — roughly 58 percent — that the record-size cohort did back in late 2004, according to the Federal Reserve. Ergo, there’s now more equity, on a per- household basis; current homeowners’ tenure is that much more sustainable and secure.”
This is misleading both because it relies on averages, thereby ignoring distribution, and also 2004 was in fact a really bad year for home equity. If we look at medians, and adjust for age (an important factor in an aging population), the situation does not look so happy.
According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the most recent one available, the median homeowner between the age of 55 to 64 had an equity stake equal to $54,600. That’s down from $71,000 in 2001 and $81,000 in 1989 (all numbers in 2013 dollars). For those between the ages of 45–54, median equity stake was just $35,900, compares to $52,100 in 2001 and $72,200 in 1989. In the 35–44 age group median equity was $23,200 in 2013, $43,800 in 2001, and $63,500 in 1989.
All these numbers are made worse by the fact that the homeownership rate within each age group was considerably lower in 2013 than in prior years. This means that the median homeowner was considerably higher up in the overall distribution of income in 2013 than in the comparison years. It is also worth noting that people have less wealth outside of their home as well, indicating that they have not opted to invest elsewhere as an alternative to homeownership.
The other item on which Lane misleads readers is the comparison to European countries where the homeownership rate is considerably lower. These countries have much stronger rules protecting renters from eviction and excessive rent increases. This makes their renters much more secure relative to renters in the United States. Given the lack of protection for renters in most areas in the United States, it is understandable that many would see homeownership as the only way to have secure housing.
In any case, Lane is right that it is not necessarily a bad thing that fewer people are shelling out large amounts of money in realtor fees and closing costs on homes that they are unable to keep. Unfortunately, this does not appear to be because people have decided that renting is a better option.
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